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U.S. MarketFlash | U.S. Set to Overtake China in Manufacturing Competitiveness

The United States is set to overtake China as the top country for "manufacturing competitiveness" by 2020, according to research from Deloitte Touche Tohmatsu and the U.S. Council on Competitiveness.

The study notes that as global manufacturing shifts toward high-margin products and services, countries with strong networks of innovation, developed physical infrastructure, highly educated workforces and laws that protect intellectual property will emerge as leaders in the age of advanced manufacturing.

CEOs surveyed for the report say that as they shift their focus to innovative, knowledge-intensive manufacturing, Brazil and Russia have lost their former allure among BRIC countries as highly competitive manufacturing locations.

Today, CEOs consider labor, cost competitiveness, productivity, supplier networks and government policies when choosing a manufa​​cturing location. While those factors will likely remain important over the next five years, executives say that big data, the internet of things, advanced materials, as well as smart products and factories, will drive the future of manufacturing competitiveness with a higher emphasis on talent, innovation and intellectual property protection.​

All three North American countries currently are among the world’s top 10 most competitive manufacturing locations and are expected to remain there through 2020. Six of the top 10 most competitive nations are also among the top 10 producers in the world. A seventh country, India, is expected to join the most competitive list by 2020. Most notably, the United States has been on the rise in global manufacturing competitiveness, moving from fourth place in 2010 to third in 2013 and now to second place in the 2016 ranking. The U.S. is projected to hit number one by 2020.

What is the rationale for this projection? While the average hourly manufacturing wage in the U.S. is nearly 11 times that of China, the U.S. leads in innovation—a strong advantage as trends in the industry change. The United States outspends all other countries on basic research and development with expenditures totaling $64.4 billion—far exceeding Japan, the second highest spender at $16 billion.

It's no surprise then that the United States files the most patents of any country, accounting for 29% of all patents filed in 2014. The U.S. also has an unparalleled manufacturing ecosystem that facilitates collaboration between Fortune 500 companies, startups, universities, venture capitalists and national laboratories to enhance its manufacturing competitiveness and commercialization.

Signs that this surge is underway can be seen in places like South Carolina, which had the highest percentage of workers employed by foreign firms in 2013 (8.4%) than any other state. International companies are investing heavily in areas like South Carolina, which were devastated by decades of factory closures and disinvestment. Foreign firms such as luxury auto manufacturer BMW, textile maker Keer Group and paper products company Shandong Tranlin have recently opened factories in the state, lured by attractive incentive packages, a skilled labor force and advantageous supplier and consumer networks.

This investment has boosted South Carolina exports considerably, now comprising 15.6% of output for the state, and has contributed to the overall resurgence of manufacturing in the U.S.

South Carolina now ranks fifth nationally in export sales growth, which totaled $30.9 billion in 2015—a 4.2% year-over-year increase. Nearly one-third of the state's exports are fueled by the bourgeoning automotive industry, which boasts more than 250 manufacturing plants, suppliers and other related companies. In 2015 alone, South Carolina's auto plants shipped $9.8 billion worth of completed vehicles to countries such as China, Germany, Canada and the United Kingdom.

Export growth in the state has boosted cargo volumes at the Port of Charleston and driven rail volumes at the South Carolina Inland Port. In fiscal year 2015, roll-on/roll-off cargo increased 8% year-over-year at the Port of Charleston, culminating in the highest finished vehicle volume ever recorded with 274,426 vehicles handled.

The Inland Port Greer also posted a record volume of 91,698 rail moves—a 57% year-over-year increase. This growing port activity has spurred industrial development throughout the Greenville-Spartanburg market, as outside investors are lured by strong fundamentals and the region's growing prominence as a global manufacturing and distribution hub.

As the manufacturing industry increasingly adopts more sophisticated processes, products and materials, nations with longstanding investments in innovation, talent and ecosystems tied to manufacturing have an advantage over developing nations with weaker infrastructure and technology networks.

If the U.S. seeks to maintain its competitive edge, it must continue to invest in innovation, talent and regulatory policies that enhance the manufacturing environment. Over the next five years, as factories become smarter and more digitally integrated, and industry leaders demonstrate a willingness to pay more for labor in order to reap the benefits of innovation, the U.S. is poised to once again lead the world in manufacturing competitiveness.